On May 16, 2013, the FASB and IASB issued a revised lease accounting exposure draft. In accordance with the standards, a lessee will recognize on the balance sheet 1) a right-to-use asset representing its use the leased asset and 2) a liability based on the present value of lease payments.
Under the new proposed standards, leases longer than 12 months will be classified into two groups: Lease Type A and Lease Type B. Leases of assets other than property (equipment, vehicles, etc.) are classified as Lease Type A. Leases of property (land and/or building or part of a building) are classified as Lease Type B.
Type B assets will:
- recognize the discount on the lease liability and amortization of the right-to-use asset under one line item,
- amortize the right-to-use asset based upon undiscounted straight-line basis less interest payments, and
- record cash lease payments in the statement of cash flows from operations.
Impairment testing for the right-to-use asset will be based on FASB ASC 360.
Comment letters must be received before September 13, 2013. The final standard is expected to be issued in 2014 with effective date no sooner than 2017.
The new standard will materially alter the balance sheets of companies which lease substantial amounts of real estate. The retail industry will be one of the most significantly affected industries, but service industries will see a surprising expansion of their balance sheets as well.